I was recently asked what advice I would give to someone going into business with another person. Without hesitation I said, “Shareholders Agreement”.
You are going to put a lot of time into the plan to start a business. Every aspect of the potential business will be discussed, analysed and peer checked. You will have conversations about how you will work together, the division of responsibilities, how much you will be paid and so on.
But, like most people heading off on a first date, not much though will be put into the scenarios of what might go wrong – the divorce scenarios. What if one of you changes their mind? Or you cannot agree on big decisions. The Shareholder's Agreement is the mechanism for handling these situations and so much more.
Right now, there will be dozens, possibly hundreds, of recruitment agency shareholders cursing the fact that their Shareholders Agreement does not exist or is not comprehensive enough to handle the circumstances they find themselves in. It does not work trying to create a Shareholders Agreement when dealing with an active issue that is emotive and can be business threatening.
So, what should be in the Agreement? It is designed to deal with the issues that arise during the life of a business, by determining in advance, how such issues should be dealt with.
- How big decisions are made, like incurring debt, or opening a bank account, capital raising, or selling the business.
- How Dividends are determined
- What happens if a shareholder leaves the business. Do they have to sell their shares to the other shareholders?
- What happens if a shareholder dies, or is incapacitated?
- What happens if a shareholder underperforms, or breaks company policy?
- What happens when there is a major disagreement? How is it resolved or mediated?
- What happens to the shareholders agreement when new shareholders enter the business? Is the document robust enough to handle the changes?
- Can a shareholder be forced out when the business changes?
- How are shares valued? What is the value of the shares in the first few years?
If you do not have a Shareholders Agreement, or it hasn’t been reviewed for years, now is a good time to get some assistance.
Article first appeared in APSCo Australia magazine "Recruitment & Co."
